Thursday, October 25, 2012

When Data Miner was a little boy
his dear old Dad told him about Dow Theory that said a move in the Dow Jones
Industrial Average needs to be confirmed by increasing volume and a
corresponding move in the Dow Jones Transportation Average. The thought was that if the companies making
products were doing well, so should the companies that move those products from
the factories to their final markets. Charles Dow
formulated his theory at the dawn of the Industrial Revolution when the
transports were the railroad companies. A look at the tear
sheet for theiShares Dow Jones
Transportation Average Index Fund (IYT) shows its sub industry exposure to still be
weighted towards those railroads comprising 31.6% of the fund with an
additional 26.8% in Air Freight & Logistics and 19.2% in Trucking. The tear sheet also shows a Risk rating of 4.13
(lower than most of the highest ranked funds) and a Reward Rating of 8.8. These two strong ratings reflect the fund’s Quant
rank at 16th place today, its highest in months
except for one day in early October.The fund is
basically where it’s been for a couple of years which has convinced many that
the rally we have seen in the Industrials over that time may not be for real. Those bears can also point to the Transports
coming down worse than the Industrials in the developing correction of the last
month. Dow Theory isn't clear on whether that correction has run its
course or has more to go so that’s where Quant can help. Both funds are scoring well today with the SPDR
Dow Jones Industrial Average Fund (DIA), also known as the Diamond, coming in at 21st place close on the heels of IYT and
its highest rank in months.The Diamond’s tear
sheet shows much more color on the charts as it is diversified across those
industries that comprise the US economy. Lower Volatility and Deviation scores, seen on theRed Diamond Risk Rating page, give it a lower Risk Rating
of 3.04 and it is basically tied on the Reward Rating at 8.81. The Fundamental measures favor the Industrials while the
Behavioral favor the Transports. These measures
don’t say the correction has necessarily run its course because Quant doesn’t
make directional calls. It does say that
these two equity funds look to be among the best to hold for the next few
months. We may be setting up for a sustainable rally that
even Dow Theorists can accept but Quant’s intermediate time horizon means that
may not happen for a couple months. Maybe we need a big
move down with heavy volume to confirm the correction. If so, Quant still suggests hiding your equity
allocation in China whereFXI andGXC are back in 1st and 2nd place
today.